QUALCOMM Incorporated (NASDAQ:QCOM) shares are down more than -14.45% this year and recently decreased -1.72% or -$0.96 to settle at $54.77. The Procter & Gamble Company (NYSE:PG), on the other hand, is down -14.44% year to date as of 04/16/2018. It currently trades at $78.61 and has returned 0.58% during the past week.
QUALCOMM Incorporated (NASDAQ:QCOM) and The Procter & Gamble Company (NYSE:PG) are the two most active stocks in the Communication Equipment industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect QCOM to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, PG is expected to grow at a 6.97% annual rate. All else equal, QCOM’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 25.43% for The Procter & Gamble Company (PG). QCOM’s ROI is 3.60% while PG has a ROI of 12.70%. The interpretation is that PG’s business generates a higher return on investment than QCOM’s.Cash Flow
Cash is king when it comes to investing. QCOM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.47. Comparatively, PG’s free cash flow per share was +0.41. On a percent-of-sales basis, QCOM’s free cash flow was 3.12% while PG converted 1.59% of its revenues into cash flow. This means that, for a given level of sales, QCOM is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. QCOM has a current ratio of 3.40 compared to 0.90 for PG. This means that QCOM can more easily cover its most immediate liabilities over the next twelve months. QCOM’s debt-to-equity ratio is 0.95 versus a D/E of 0.71 for PG. QCOM is therefore the more solvent of the two companies, and has lower financial risk.Valuation
QCOM trades at a forward P/E of 14.65, a P/B of 3.38, and a P/S of 3.59, compared to a forward P/E of 17.43, a P/B of 3.75, and a P/S of 3.03 for PG. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. QCOM is currently priced at a -19.96% to its one-year price target of 68.43. Comparatively, PG is -13.99% relative to its price target of 91.40. This suggests that QCOM is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. QCOM has a beta of 1.47 and PG’s beta is 0.55. PG’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. QCOM has a short ratio of 1.40 compared to a short interest of 3.25 for PG. This implies that the market is currently less bearish on the outlook for QCOM.Summary
QUALCOMM Incorporated (NASDAQ:QCOM) beats The Procter & Gamble Company (NYSE:PG) on a total of 8 of the 14 factors compared between the two stocks. QCOM is growing fastly, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, QCOM is the cheaper of the two stocks on an earnings and book value, QCOM is more undervalued relative to its price target. Finally, QCOM has better sentiment signals based on short interest.